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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Accounting and Economics, Volume 33, Issue 2, June 2002, Pages 229–251
We investigate a pervasive voluntary disclosure practice—managers including balance sheets with quarterly earnings announcements. Consistent with expectations, we find that managers voluntarily disclose balance sheets when current earnings are relatively less informative, or when future earnings are relatively more uncertain. Specifically, balance sheet disclosures are more likely among firms: (1) in high technology industries; (2) reporting losses; (3) with larger forecast errors; (4) engaging in mergers or acquisitions; (5) that are younger; and (6) with more volatile stock returns. This is consistent with managers disclosing balance sheets in response to investor demand for value relevant information to supplement earnings.
Empirical research investigating voluntary management disclosure tends to focus on earnings disclosures, management forecasts, and to a lesser extent, overall disclosure levels.1 However, a relatively pervasive voluntary disclosure practice that is not investigated in prior research is management's inclusion of balance sheet information along with quarterly earnings announcements. The purpose of this study is to describe the characteristics of voluntary balance sheet disclosures, and to investigate management's incentives to include balance sheet information in their quarterly earnings announcements. We examine all quarterly earnings announcements included in the Wall Street Journal ProQuest database for the 12 quarters ending with the third quarter of 1995. Our analysis finds that 52% of the 2,551 firms in our sample include a balance sheet in at least one quarterly earnings announcement, and that 37% of the 23,086 quarterly earnings announcements we identify include a balance sheet. We also find that the percentage of quarterly earnings announcements containing balance sheets grows from 31% to 46% over the period we analyze. In addition, once firms begin including balance sheets in their quarterly earnings announcements they tend to continue, with just 35% ceasing to include balance sheets once they initiate disclosure. Therefore, we conclude that including balance sheets in earnings announcements is a pervasive voluntary disclosure practice that is growing over the period we examine. We argue that managers have incentives to voluntarily include balance sheet information along with quarterly earnings announcements when current earnings are relatively less informative, or when future earnings are relatively more uncertain. In these settings investors are likely to have a greater demand for additional value relevant information—such as balance sheets—to help assess firm value. We test our conjecture by developing several hypotheses that identify settings in which investors are likely to find current earnings relatively less informative, or future earnings relatively more uncertain. Consistent with our predictions, a logit analysis finds that managers are more likely to disclose balance sheet information along with quarterly earnings announcements for firms: (1) in high technology industries; (2) reporting losses; (3) with larger forecast errors; (4) engaging in mergers or acquisitions; (5) that are younger; and (6) with more volatile stock returns. These findings are consistent with managers disclosing balance sheet information when investors demand additional value relevant information to help assess firm value. To investigate the robustness of our logit results we also examine the price–earnings and the returns–earnings associations of firms with and without voluntary balance sheet disclosures. Comparing the R2 in regressions of quarterly earnings on share price across disclosure and non-disclosure observations indicates that earnings explain a significantly lower proportion of share value among firms that make balance sheet disclosures. This is consistent with firms supplementing their earnings disclosures with balance sheet information when earnings are less value-relevant. However, comparing the R2 in regressions of quarterly earnings on stock returns across disclosure and non-disclosure observations indicates that there is no difference in the explanatory power of earnings across the two groups. Thus, our market tests find mixed evidence that balance sheet disclosures are made when earnings are relatively less informative. Our study contributes to the literature that examines voluntary management disclosures and the usefulness of balance sheet information in valuing securities. While theory and empirical evidence suggest that the balance sheet is an important source of value relevant information, and a large body of literature documents that share price is associated with balance sheet information, prior research provides little evidence on whether firms are voluntarily forthcoming with balance sheet information when it is most likely to be useful beyond earnings information. We shed light on this issue by investigating firms’ voluntary balance sheet disclosures and provide evidence consistent with managers making these disclosures in response to investor demand for additional value-relevant information to supplement reported earnings. The next section motivates our hypotheses, Section 3 presents our research design, and Section 4 discusses our sample and presents our hypotheses tests. Section 5 presents an analysis of market variables, Section 6 presents robustness checks and Section 7 summarizes our findings.